The Importance of Market-Clearing Price in the Petrol/Oil Industry
Living in a world where the majority of the modes of transport rely on oil, we are constantly worrying about the stability of the petrol markets. The economic foundation, regardless of the economic system, of several countries such as Saudi Arabia, Venezuela, and India stems from oil production and prices. However, these prices not only affect the countries that produce oil, but all countries that rely heavily on oil for fuel. In the Forbes article, the author mentions that “messing with the [petrol] price system is a guaranteed method of producing economic chaos.” Instead of setting artificial prices, the price of oil should be determined by the market, indicating that the market set price should become the market-clearing price. If the market-clearing price is not achieved, then the oil market will either have shortages or stockpiles of petrol.
In class, we discussed matching markets and the importance of setting market-clearing prices in order to satisfy happiness or satisfaction in a certain scenario. The Forbes article expands upon the scenarios given in class and in the textbook and apply the importance of market-clearing prices in the global economy. The major cause of the free falling Venezuelan economy is due to fixed petrol prices, according to the author. Fixing prices below the market-clearing price increases the buyer’s demand, however, can cause some sellers to dropout or produce less in the market, since the price may be less than they desire. This dichotomous processes triggers a high demand, but low supply causing undesired shortages. In order to maximize happiness and create a supply-demand equilibrium, market-clearing prices should be established.